cognitive psychology Cognitive psychology is the scientific study of mental processes such as attention, language use, memory, perception, problem solving, creativity, and reasoning. Cognitive psychology originated in the 1960s in a break from behaviorism, which ...

and

decision science Decision theory (or the theory of choice; not to be confused with choice theory) is a branch of applied probability theory concerned with the theory of making decisions based on assigning probabilities to various factors and assigning numerical ...

, conservatism or conservatism bias is a

bias Bias is a disproportionate weight ''in favor of'' or ''against'' an idea or thing, usually in a way that is closed-minded, prejudicial, or unfair. Biases can be innate or learned. People may develop biases for or against an individual, a group, ...

which refers to the tendency to revise one's belief insufficiently when presented with new evidence. This bias describes human

belief revision Belief revision is the process of changing beliefs to take into account a new piece of information. The logical formalization of belief revision is researched in philosophy, in databases, and in artificial intelligence for the design of rational age ...

in which people over-weigh the

prior distribution In Bayesian statistical inference, a prior probability distribution, often simply called the prior, of an uncertain quantity is the probability distribution that would express one's beliefs about this quantity before some evidence is taken int ...

(

base rate In probability and statistics, the base rate (also known as prior probabilities) is the class of probabilities unconditional on "featural evidence" (likelihoods). For example, if 1% of the population were medical professionals, and remaining ...

) and under-weigh new sample evidence when compared to Bayesian belief-revision. According to the theory, "opinion change is very orderly, and usually proportional to the numbers of

Bayes' theorem In probability theory and statistics, Bayes' theorem (alternatively Bayes' law or Bayes' rule), named after Thomas Bayes, describes the probability of an event, based on prior knowledge of conditions that might be related to the event. For examp ...

– but it is insufficient in amount". In other words, people update their prior beliefs as new evidence becomes available, but they do so more slowly than they would if they used Bayes' theorem. This bias was discussed by

Ward Edwards Ward Edwards (1927–2005) was an American psychologist, prominent for work on decision theory and on the formulation and revision of beliefs. Education Edwards attended Swarthmore College and then received his Ph.D. in Psychology from Harvar ...

in 1968, who reported on experiments like the following one:

There are two bookbags, one containing 700 red and 300 blue chips, the other containing 300 red and 700 blue. Take one of the bags. Now, you sample, randomly, with replacement after each chip. In 12 samples, you get 8 reds and 4 blues. what is the probability that this is the predominantly red bag?

Most subjects chose an answer around .7. The correct answer according to Bayes' theorem is closer to .97. Edwards suggested that people updated beliefs conservatively, in accordance with Bayes' theorem, but more slowly. They updated from .5 incorrectly according to an observed bias in several experiments.

In finance

In finance, evidence has been found that investors under-react to corporate events, consistent with conservatism. This includes announcements of earnings, changes in

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...

s, and

stock split A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of mark ...

Possible explanations

The traditional explanation for this effect is that it is an extension of the

anchoring bias The anchoring effect is a cognitive bias whereby an individual's decisions are influenced by a particular reference point or 'anchor'. Both numeric and non-numeric anchoring have been reported in research. In numeric anchoring, once the value of ...

, as studied by Tversky and Kahneman. The initial "anchor" is the .5 probability given when there are two choices without any other evidence, and people fail to adjust sufficiently far away. However, a recent study suggests that the belief revising conservatism can be explained by an

information-theoretic Information theory is the scientific study of the quantification, storage, and communication of information. The field was originally established by the works of Harry Nyquist and Ralph Hartley, in the 1920s, and Claude Shannon in the 1940s. T ...

generative mechanism that assumes a noisy conversion of objective evidence (observation) into subjective estimates (judgment). The study explains that the estimates of conditional probabilities are conservative because of noise in the retrieval of information from memory, whereas noise is defined as the mixing of evidence. and the result is conservatism (low is not low enough, and high is not high enough, the result is not extreme enough, which is conservative). In an incentivized experimental study, it has been shown that the conservatism bias decreased in those with greater cognitive ability, though it did not disappear.

References

{{reflist, refs= Edwards, Ward. "Conservatism in Human Information Processing (excerpted)". In Daniel Kahneman, Paul Slovic and Amos Tversky. (1982). ''Judgment under uncertainty: Heuristics and biases''. New York: Cambridge University Press. {{ISBN, 978-0521284141 Original work published 1968. {{Cite journal , doi=10.1037/a0025940 , title = Toward a synthesis of cognitive biases: How noisy information processing can bias human decision making, journal = Psychological Bulletin, volume = 138, issue = 2, pages = 211–237, year = 2012, last1 = Hilbert, first1 = Martin, pmid = 22122235, url=http://www.martinhilbert.net/HilbertPsychBull.pdf {{cite journal, last=Kadiyala, first=Padmaja, author2=Rau, P. Raghavendra, title=Investor Reaction to Corporate Event Announcements: Under-reaction or Over-reaction?, journal=The Journal of Business, year=2004, volume=77, issue=4, pages=357–386 , jstor=10.1086/381273, doi=10.1086/381273. Earlier version at {{doi, 10.2139/ssrn.249979 Belief revision Bayesian inference Cognitive inertia Error Ignorance

In finance

Possible explanations

See also

References